Social Impact Investing: Risk, Reward and Responsibility

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Impact investing – also known as sustainable, responsible, and impact investing (SRI) – has been forecast to surpass $300 billion by 2020. McKinsey & Company defines impact investing as “directing capital to enterprises that generate social or environmental benefits.” Mainstream investors have their reservations regarding this type of investment, but their reasons for staying away from impact investing may be based on myths.

To learn more, check out the infographic below created by Ohio University’s Online Master of Accountancy.

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Who Believes in Impact Investing and Why?

$22.89 trillion. That’s the amount of sustainable investment assets on the books globally for 2016. It’s a number built on a wide range of metrics. Across 248 institutional deals between 2010 and 2016, 72% of core investors invested in agricultural startups, while 66% of core investors placed funds in financial inclusion startups. Other specific startups with significant investments include education (53%), health care (46%), and clean energy (40%). 56% of core impact investors also invested in other startups.

The Next Wave of Investors

Studies indicate women will hold $72 trillion of private wealth by 2020. Meanwhile, it’s projected that millennials will inherit $7 trillion between 2017 and 2020. These metrics touch upon thoughts concerning what makes up the profile of impact investors. For instance, 63% of women and 41% of men state social, political, and environmental concerns are important to their investment decisions. Furthermore, 76% of women and 67% of millennials want investments to align with their social and environmental values. Millennials are also twice as likely to make a sustainable investment than the average investor.

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Challenging the Conventional View on Impact Investing

Investors committed more than $35 billion to social enterprises. However, as more investors consider impact investing, they’ll need to understand the unique needs of social enterprises. They’ll also need to provide the ability to balance social impact with economic returns, a strategy that may rely on expertise in nurturing talent, systematic expansion, scaling, and refining processes.

As a result of this, startups and investors need an updated set of accounting standards to accurately measure and report the financial impact of socially conscious efforts. One of the ways to meet this challenge is the Sustainability Accounting Standards Board (SASB), which was established to help businesses identify, manage, and report their sustainability efforts.

Conducting Due Diligence

To reduce the risks of an impact investment, finance and accounting professionals must consider a few key questions. They must determine whether the primary goal of the investment is to realize financial gain or to make an impact. They must also assess the financial risks and discern what sources of capital will be required to pursue this opportunity. Finally, they must determine how such an opportunity fits into the organization’s overall asset allocation.

Apps, Platforms & Investment Funds

Numerous companies have developed apps and platforms to assist consumers and investors interested in making a difference with their purchases and investments. Investment fund 2B Angels, with its commitment to investing only companies that bring in clear value to the world, is pushing the concept of impact investing even further.

One of these platforms is motif investing, which allows investors to invest either thematically or based on specific categories. It also uses data science to remove subjective bias and uncover trends. It offers a white label B2C digital platform that’s being used by Goldman Sachs, U.S. Banks, JP Morgan Chase, and other large corporations.

Another platform, Wealthsimple, can custom-build user portfolios in a matter of minutes. It also features expert advisors on hand to help users meet their goal. Furthermore, they feature smart portfolios that diversify funds across the market. This platform ultimately offers options for socially responsible for investing with low-fee exchange traded funds (ETFs) screened for environmental and social impact.

A third platform, Swell Investing, gives investors the choice to set up either an IRA or a traditional brokerage account, although it does not offer exchange traded funds or mutual funds. The company itself screens for companies that have revenues aligning with at least one of the 17 U.N. Sustainable Development Goals and negatively screens for exploitative industries.

Finally, Aspiration is a company providing banking and investment services, offering up to 2% APY on savings accounts. Its customers can choose to pay $0 in monthly fees and can access any ATM worldwide without paying a fee. Aspiration adheres to social investments by not investing customer deposits in fossil fuel projects. It also donates 10% of its profits to charities helping Americans.

These platforms conduct a practice that creates impact investing. However, 2B Angels CEO Yoel Chesin prefers a different term: conscious capitalism. According to an interview conducted by Forbes, Chesin states, “There shouldn’t be a distinction between impact and non-impact. Every investment should bring value to the world! When we say impact investing, we’re creating a false divide between profit and impact, between the consumer and the investor.”

Conclusion

It is no longer a question of whether companies should invest in social causes. Around the world, investors and entrepreneurs are looking for investment and business opportunities that align with their personal values. Accounting standards and investment principles are adapting. It’s time for business owners to think about how they will participate in impact investing.